In late February, we learned from Standard & Poor’s Ratings Services that the U.S. not-for-profit healthcare sector had begun to stabilize. Or at least it had stabilized enough so that S&P expects its healthcare ratings and outlooks won’t be tanking in 2010.
Still, the ratings firm is not completely convinced that U.S. healthcare is free of financial difficulties.
“Many questions remain about the longer-term health of the sector, including significant uncertainties about the future of healthcare reform in the wake of the recent failure to pass major legislation,” says Martin Arrick, a credit analyst at S&P. He notes that the current stabilization for S&P’s rated healthcare providers is “at levels generally below prior peaks.”
But what does this mean for how hospitals and health systems operate in 2010?
One sign of a return from recession would be an increase in capital spending.
Nik Fincher, vice president of purchased services and capital at VHA, Inc., a healthcare group purchasing organization, says capital spending wasn’t actually as bad for hospitals in 2009 as some might have assumed. And he believes things will likely get better in 2010.
“Capital doesn’t really care about the economy,” Fincher told me. “If you have capital and you’re running a business, it’s depreciating. The useful life of capital is a relatively defined period of time. That’s why capital is different than supply purchasing, which can be reduced as patient demand goes down. But expensive equipment has to be maintained and upgraded.”
Fincher says 2009 could have been a lot worse for capital spending, given the depth of the recession.
“We saw flat spending in 2009, or sometimes slightly less than in 2008, especially on the East and West coasts,” Fincher said. “The areas that were hit the hardest were big projects – renovations or new construction. If something wasn’t mission critical, it was hard to get it approved. But the thing is, if you decided to defer or delay a project, you didn’t eliminate the need.”
Many of VHA’s member hospitals told Fincher in 2009 that they had frozen their capital budgets. These hospitals said the downturn started for their institutions in mid-to-late 2008. Nonetheless, the development of technology and the regulatory environment continued to move forward, so it was only a matter of time before healthcare institutions would have to ramp up their capital spending.
“I think you’re going to see more momentum toward an increase in capital expenditures,” Fincher said. “From a financial standpoint, with the stock market moving above 10,000, executives are feeling a bit better about their investments. And with the government moving toward quality-based care, that will be a driver toward certain forms of capital investment.”
When hospital executives consider whether or not to initiate a capital project, they measure the cost of the project against the institution’s mission – its “core utility,” as Fincher says. Hospital decision-makers need to determine the operational impact of a capital project before deciding whether to approve it.
Stand-alone rural hospitals may be making more of those decisions in 2010, as Fincher expects that sector to enjoy a boost in capital spending. He also predicts that West coast hospitals are going to invest in capital equipment, many of them to meet mandated seismic retrofit requirements.
Fincher says he knows of 36 California-based capital projects that will move $8-9 billion in spend through the economy in 2010. And that trend is not unique to the Golden State.
“I think there is going to be more release on the capital project side as more hospitals learn about the low-cost bond dollars that are available as part of the Recovery Act,” Fincher said. “But if that demand releases, how flexible will suppliers be on discounts?”
One would hope, given the recession’s impact on hospital spending to date, that they would be very flexible indeed.